5 Ways to Save for Your Dream House in the New Year

You’ve decided 2017 is the year to ramp up your homebuying savings. You’ve finally zeroed in on one of the adorable bungalows that you bookmarked online. Debbie Downer alert: To do that, you’ll need to make a down payment, which nearly three-quarters of millennials say is the biggest hurdle to homebuying, according to a June 2016 survey by TD Bank.

But there are plenty of ways to put less than the traditional 20% down for a house, as long as you weigh the potential trade-offs. You can also use savings strategies to boost your reserves. Here’s how to make homeownership happen in 2017.

1. Tap into low down payment programs

Make your savings plan for the year more manageable by looking into mortgage programs that allow smaller down payments. The average first-time homebuyer put 6% down in 2016, according to a recent survey by the National Association of Realtors. In some cases, that privilege may cost you extra on your monthly mortgage. Use a mortgage calculator to weigh the pros and cons of making a down payment of less than 20%.

- FHA loans, guaranteed by the Federal Housing Administration, require down payments of just 3.5% of the home’s purchase price. You can get reasonable interest rates and approval even with a less than stellar credit score, but you’ll have to pay a mortgage insurance premium. The insurance policy protects the lender in case you can’t repay the loan, and it will add to your upfront costs and monthly payment.

- Several conventional lenders such as Bank of America and Citibank offer mortgages with low down payments geared toward low- to moderate-income buyers. Talk to a local housing counselor about your options, and ask about state and local down payment assistance programs, too.

2. Check if you qualify for special housing discounts

More generous programs are available if you meet special requirements. Potential homeowners in rural areas should look in to U.S. Department of Agriculture loans, which are available for 0% down if you meet the income guidelines.

Teachers, police officers, firefighters and emergency medical technicians can get a discount of up to 50% off a home’s purchase price through the Department of Housing and Urban Development’s Good Neighbor Next Door program. To participate, you must buy a home in a designated revitalization area and live there for at least three years.

Military service members and veterans can get a Department of Veterans Affairs loan that doesn’t require a down payment or mortgage insurance and comes with low closing costs.

Elizabeth Colegrove and her husband, a Navy pilot, used a VA loan to buy their first house five years ago. The home included an apartment that they rented out. Now the Anacortes, Washington-based couple own eight rental properties. That might sound out of reach. But Colegrove says it was possible because she and her husband also took advantage of other low down payment programs, including conventional mortgages that required 5% down.

“It’s more just understanding the rules and having a game plan,” she says.

3. Refinance your student loans

One potential avenue for freeing up money for the down payment is refinancing your student loans. That replaces your previous loans with a new one at a lower interest rate. You’ll have to meet a lender’s credit score minimum, which typically is 700, and show stable income from a full-time job. Keep in mind that refinancing federal student loans means that you’ll lose benefits such as income-driven repayment and forgiveness.

Here’s an example of what your savings could look like: Say you have $40,000 left to repay on a 10-year, $50,000 private student loan. If you refinance it from an interest rate of 8% to 4%, also at a 10-year term, you’ll save about $202 a month plus about $4,271 in interest over the life of the loan.

4. Stash (a portion of) your windfalls

If you expect to get a bonus or tax refund, commit now to directing at least some of it toward your down payment fund. Using the 50/30/20 budgeting method, set aside 50% of the amount for debt payoff, 30% for savings and 20% for fun. But first, pay off any high-interest credit card debt so that you don’t lose money on interest while saving for a house.

5. Grow your money with a CD

Finally, look at building up your diligently saved money. The stock market can rise and fall drastically in the short term, so it isn’t wise to invest your savings in stocks if you want to buy a home soon.

But your money doesn’tneed to languish in a traditional savings account with low interest, either.

Consider a certificate of deposit. A CD locks up your money for a period of time, generally from six months to five years, for a higher rate of return. If you can deposit $5,000 for a five-year term, you could find CD rates as high as 2.05%. Some one-year CDs with $1 minimum deposits can earn 1.20% interest, which is higher than that for most savings accounts.